Sunday, March 1, 2009

Early Rebound In China Is Unlikely

Andrew Batson
Hopes for an early recovery in China's economy are starting to unravel, undercutting the optimism that has helped make the country's stock market the world's best performer this year.
In recent weeks, some companies and investors had seized on a surge in bank lending and an upturn in steel prices -- a key indicator in China's industry-heavy economy -- as signs that a massive government stimulus program was already taking hold.
But now steel prices are falling again, and closer examination of the recent bank data suggests that many of the loans won't immediately fuel economic growth. Meanwhile, trade has continued to contract, as demand for Chinese exports from the U.S. and Europe wanes, and Chinese companies and consumers, in turn, buy fewer foreign goods.
The upshot is that a real pickup in China's economy could still be several months away, or longer. That's bad news for a global economy in which China is the only major power still growing.
'It would be a mistake to think that China could decouple from the rest of the world, or carry the rest of the world on its shoulders,' said Bruce Kasman, chief economist for JP Morgan. 'A sustained recovery in China is dependent on better news globally.'
China's government has put about 230 billion yuan ($34 billion) into stimulus projects so far, with more to come. Most economists think it will take time for that jolt to work its way through the economy, and don't expect major effects to show up until around the second half of this year.
Local companies, more optimistic about the stimulus package, began bidding up steel prices and freight rates in December. Investors did the same with Chinese stocks: The benchmark Shanghai Composite Index at one point this month was up 30% for the year, though it has come down a bit since. By the beginning of February, steel prices had gained about 15% from November lows. China is the world's largest consumer of the metal, and the run-up in prices got a lot of attention.
But much of that steel was stockpiled, rather than immediately used in factories or construction sites. Inventories of some steel products rose more than 30% in January from December, the China Iron & Steel Association said in a report last week.
'Recent additions to inventories by dealers and users have led to a rebound in steel market prices . . . [but] the steady increase in inventories will affect the stable operation of the steel market later on,' it said.
The anticipated demand hasn't yet materialized, and those inventories are weighing on the market. Average steel prices dropped 6.3% last week, after falling 3.2% the week before, according to Mysteel, a Shanghai-based research firm.
Getting a solid read on the Chinese economy has been particularly difficult in recent weeks because the weeklong Lunar New Year holiday fell earlier this year than in 2007, distorting annual comparisons of key indicators in January.
Other data reinforce the sense that economic activity has yet to revive. Industrial output in the business hub of Shanghai fell 12.7% from a year earlier in January -- even after adjusting for the holiday. (Nationwide, industrial statistics haven't yet been published for January). Also, imports nationwide fell 43.1% in January from a year earlier -- a drop that, allowing for the holiday impact, suggests slowing demand in China.
'Domestic demand for imports is still very weak, as the housing-construction slump continues, and the fiscal stimulus-induced investment demand has yet to come through,' said UBS economist Wang Tao.
The huge expansion in lending in January -- banks made 1.62 trillion yuan in new loans, twice as much as last year -- was widely seen as a positive sign. But other data on deposits suggest companies are hoarding their cash rather than spending it, so those loans may not be immediately fueling economic growth.
Further doubts have been raised by the unusual nature of recent loans. Short-term bills accounted for 42% of new corporate lending in January, or 623.9 billion yuan, three times the already elevated level of November and December, and ten times October's figure.
Because companies can borrow those bills for a lower interest rate than they earn on deposits, some economists think the surge comes more from financial engineering than actual borrowing. 'Recent monetary and credit data do not reflect real economic demand,' said Ha Jiming, chief economist of China International Capital Corp.
Meanwhile, major Chinese port operators are reporting even lower volumes of containers coming through in February than in January, Citigroup analysts Ally Ma and Brian Lam wrote in a report this week. Based on those data and other indicators, an annual decline of 20% or more in Chinese exports in coming months 'seems inevitable,' the analysts wrote.